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Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
Q4 2013 FX Market Monitor
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Q4 2013 FX Market Monitor

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A Review of the Leading Factors affecting the FX Market in the 4th Quarter 2013. Many fundamental factors, including national economic conditions, monetary policies and current and capital account …

A Review of the Leading Factors affecting the FX Market in the 4th Quarter 2013. Many fundamental factors, including national economic conditions, monetary policies and current and capital account flows, to name just a few, impact the returns associated with the world’s currencies.

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  • 1. CURRENCIES Currency Market Monitor 4th Quarter 2013 JANUARY 6, 2014 John W. Labuszewski Sandra Ro Bluford Putnam Managing Director Executive Director Chief Economist Research & Product Development Research & Product Development Research & Product Development 312-466-7469 011 (44) 203-379-3789 212-299--2302 jlab@cmegroup.com sandra.ro@cmegroup.com bluford.putnam@cmegroup.com
  • 2. An ongoing debate has long persisted in the global currency or FX markets – is FX an “asset class” akin to stocks and bonds? While practitioners and academics may debate this point at length, perhaps the most practical answer is – does it really matter provided that investors may draw a return from currency investments? The performance of the currency or FX markets is found in the exchange rates and cross-rates associated with the world’s myriad currencies. The total return associated with a currency is driven by interest income associated with fixed income instrument investment in the particular currency; as well as pure price performance. Many fundamental factors, including national economic conditions, monetary and policies, current and capital account flows, to name just a few, impact the returns associated with the world’s currencies. This document represents a review of these factors as they played out in the most recently completed calendar quarter. We include consideration of the so-called “carry trade” as well as a look at the theory of “purchasing power parity” as it impacts FX markets. While we cover activity in a broad spectrum of currencies, we focus on the currencies underlying some of the most liquid of CME Group FX futures. This includes the U.S. dollar (USD), Euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD) and Mexican peso (MXN). In addition, we have special interest in the currencies of significant emerging market economies including the Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan or renminbi (CNY) – the so-called “BRIC” nations. Finally, we highlight several CME Group FX Indexes including a USD Index, a Carry Trade Index, Commodity Country Index and BRIC Index. These factors including growth and inflation prospects; monetary and fiscal policies; and, current and capital account balances. To illustrate, we include a brief discussion of the economic situation prevailing in the United States as of the conclusion of the most recently completed calendar quarter. Of course, the U.S. dollar (USD) may be just one side of any currency pair that may be traded using CME FX futures. A brief summary of economic conditions in various nations, organized along similar lines, is included in Appendix 1 of our document below. One may compare and contrast these conditions as they exist in the two countries whose currency pairing one may be interested in to draw an appreciation of the fundamental factors that impact currency markets. Growth and Employment We entered the 4th quarter 2013 on disappointment surrounding the Fed’s announcement of September 18th that it will defer any possible “tapering” of its quantitative easing (QE) programs, despite evidence of economic growth. Specifically, the Fed “decided to await more evidence that [economic] progress will be sustained before adjusting the pace of its purchases … these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.” 1 The Federal Reserve framed its concerns succinctly suggesting that “labor market conditions have shown further improvement in recent months, but the employment rate remains elevated.” 2 But the 4th quarter brought more evidence of economic recovery as 3rd quarter real GDP reportedly grew by 4.1% and up nicely from the 3rd, Market Fundamentals As a general rule, FX analysts will evaluate the fundamental value of any particular currency by reference to a number of national economic factors. 1 1 2 Federal Reserve Press Release dated September 18, 2013. Ibid. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 3. 2nd and 1st quarter marks of +2.5%, +1.1% and +0.1%, respectively. This growth drove the unemployment rate down to 7.0% by November 2013, down from the year’s high of 7.9% reported for January 2013. Thus, the Fed observed, per its Press Release dated December 18th, that “economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated.” 3 Growth and Employment The total number of employed remains less than the peak of 138.056 million observed in January 2008 before the subprime mortgage crisis. Ranks of the employed fell sharply before starting to recover and stood at 136.765 million as of November 2013. Thus, we have gone some 70 months and have yet to recover to pre-crisis levels. This represents the most extended recovery from recession during the past 35 years. 11% 4% 10% 2% 9% 0% 8% -2% 7% -4% Real GDP (SA) Q2 13 Q3 12 Q4 11 Q1 11 Q2 10 Q3 09 Q4 08 4% Q1 08 -10% Q2 07 5% Q3 06 -8% Q4 05 6% Q1 05 -6% Unemployment Rate Qtrly Change in GDP 6% NFP Recovery from Recession 101% 100% Unemployment Rate NFPs as % of Peak Source: Bureau of Economic Analysis (BEA) & Bureau of Labor Statistics (BLS) While recent reports are certainly encouraging, we must still note that labor force participation was last reported at a mere 63.0% in November 2013. This represents an uptick from the trough of 62.8% reported for October 2013. 99% 98% 97% 96% 95% 94% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 93% Employment Statistics 68% 10% 67% 9% 66% 8% 65% 7% 64% 6% Unemployment Rate Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 62% Jan-04 4% Jan-03 63% Jan-02 5% Months Since Peak NFP Labor Force Participation Unemployment Rate 11% Labor Force Partcipation Source: Bureau of Labor Statistics (BLS) But it nonetheless falls short of the 63.6% reported at year’s end 2012 and remains near all-time lows. This, of course, calls into question whether the declining unemployment numbers represent healthy growth or may be attributed to widespread workplace dropout and a structural shift in the employment paradigm. Apr - Dec-80 Jul-90 - Jan-93 Feb-08 - Jun-13 The unemployment situation may be further exacerbated as emergency unemployment insurance benefits are curtailed as of December 28, 2013 as a result of recent Federal budget agreements. The Fed further suggests that “[h]ousehold spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.” 4 This is reflected in retail sales figures which continued to grow to $184.837 billion in November 2013 and up 3.3% on a year-on-year basis from the previous November. This consumer exuberance is driven perhaps by the “wealth effect” associated with a buoyant equity 3 4 2 Aug-81 - Oct-83 Mar-01 - Jan-05 Federal Reserve Press Release dated December 18, 2013. Ibid. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 4. 1.45 $180 1.40 $175 $170 1.35 $165 1.30 $160 1.25 $155 Jun-13 Real Retail Sales & Food Services SA Total Business Inventory:Sales Ratio Industrial Sector Activity 105 80% 100 74% 90 $70 $65 $60 $55 68% Jun-13 Apr-12 Nov-12 Sep-11 Jul-10 Feb-11 Dec-09 Oct-08 May-09 Mar-08 66% Index of Industrial Production Capacity Utilization Further possible sources of future inflationary pressures might be anticipated in the housing sector where November 2013 building permits, housing starts and housing completions were reported +7.9%, +29.6% and +21.6% on a year-on-year basis from the previous November. Housing Activity 2,500 2,000 1,500 1,000 Q4 13 Q1 13 Q2 12 Q3 11 Q4 10 Q1 10 Q2 09 Q3 08 Q4 07 $50 Q1 07 70% 85 Jan-07 $75 Q2 06 72% Source: St. Louis Federal Reserve FRED Database 000 Units 100 95 90 85 80 75 70 65 60 55 50 Consumer Confidence Index Net Worth & Consumer Sentiment $80 Q3 05 76% 80 This exuberance is also reflected in rising consumer sentiment figures. The University of Michigan Consumer Sentiment Survey was reported at 82.5 in December 2013. This represents a nice uptick from November’s 75.1 but remains below the year’s peak of 85.1 reported in July. Q4 04 78% 95 Source: U.S. Census Bureau Household Net Worth (Trillions) 82% Aug-07 Apr-12 Nov-12 Sep-11 Jul-10 Feb-11 Dec-09 Oct-08 May-09 Mar-08 Jan-07 1.20 Aug-07 $150 Inventory:Sales Ratio Retail Sales (Bil $) 1.50 $185 Capacity Utilization Retail Sector Activity $190 Capacity utilization further climbed to 79.0% in November 2013 compared to the prior October report of 78.2%. Note that 80% is often regarded as a key level, at which point economists generally expect to see occasional labor or material shortages or bottlenecks arise, possibly contributing to inflationary pressures. Industrial Production Index market. The net worth of households and nonprofit organizations was reported at a new all-time high of $77.259 trillion as of the 3rd quarter 2013 and up 11.0% of a year-on-year basis. 500 Similarly the Index of Industrial Production rallied to 101.2825 by November 2013, representing a 3.2% advance on a year-on-year basis from the prior year’s November report. As such, the industrial sector has now bounced back to levels in excess of those observed prior to the subprime crisis, noting that the Index of Industrial Production is calibrated to 100 as of 2007. 3 Building Permits Sep-12 May-13 Jan-12 May-11 Sep-10 Jan-10 May-09 Sep-08 Jan-08 Sep-06 May-07 Jan-06 Source: U.S. Federal Reserve & FRED Database May-05 Consumer Sentiment Index Sep-04 Jan-04 0 Household Net Worth Housing Starts Source: Dept. of Housing & Urban Development (HUD) This recovery is further reflected in the S&P/CaseShiller 10-City Composite Housing Index which was reported +13.3% on a year-on-year basis from September 2012 to September 2013; and, +22.92% from the trough observed in March 2012. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 5. monitors the B/E Inflation Rate as an indication of inflationary prospects. Inflation The Fed currently sees little evidence of inflationary pressures. On the contrary, it “recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.” 5 10-Year B/E Inflation Rate 3.0% 2.5% 2.0% 1.5% Consumer Price Index (CPI) 1.0% 6% 0.5% 4% 3% Jul-13 Jan-13 Jul-12 Jul-11 Jan-12 Jan-11 Jul-10 Jul-09 Jan-10 Jul-08 Jan-09 1% Jan-08 2% Jul-07 0.0% Jan-07 Year-on-Year Change 5% 0% -1% -2% CPI - All Urban Consumers SA Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 -3% CPI ex-Food & Energy SA It is interesting to note that the Fed had historically announced various incarnations of its quantitative easing (QE) programs on dips in the B/E Inflation Rate. The Fed’s December 18th tapering announcement was likely supported by the fact that the B/E Inflation Rate now hovers just above 2%. Source: Bureau of Labor Statistics (BLS) Monetary Policy Indeed, the Consumer Price Index (CPI) was reported at +1.2% on a year-on-year basis in November 2013 while the CPI excluding volatile food and energy prices was reported at +1.7%. These figures have generally been winding downward over the last year or two, raising concerns in some sectors of a possible deflationary spiral. But as discussed above, we have seen capacity utilization advance to 79.0%, along with anecdotal reports of labor shortages in some industries notably including construction. This is underscored by evidence of housing recovery and price advances, although it is noteworthy that housing activity remains well below pre-crisis levels. Further insight might be found by examining the “Breakeven (B/E) Inflation Rate.” This is calculated as Treasury yields minus the real yield on Treasury Inflation Protected Securities (TIPs). This measure generally reflects investor expectations regarding future inflation prospects. Thus, the Fed closely 5 4 Ibid. The 3rd quarter ended with disappointment that the Fed had deferred on any possible tapering in its QE programs per which they have purchased some $85 billion of Treasuries, agency debt and agency mortgage backed securities (MBS) on a monthly basis. But by the conclusion of the 4th quarter, the Fed acknowledged “improvement in economic activity and labor market conditions … consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” 6 6 Ibid. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 6. This aggregate $10 billion in tapering on a monthly basis is consistent with expectations as reported in this publication at the conclusion of the 3rd quarter. Further tapering, however, will be deferred “until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-termr objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” 7 Similar measured taperings are now expected throughout calendar year 2014 although it may be a meeting or two before further steps are taken. Tapering was further supported by updated Fed projections of 2.2-2.3% in 2013, upwardly revised from previous projections of 2.0-2.3% growth. Growth in 2014 was projected at 2.8-3.2%. 8 0 to ¼ percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” 9 The Fed further explains that “[i]n determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates … that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that unemployment rate declines to 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-term goal.” 10 Benchmark U.S. Rates 6% Fiscal Policy 5% The Fed acknowledged that “[f]iscal policy is restraining economic growth, although the extent of restraint may be diminishing.” 11 The fiscal stimulus implicit in the 2009 through 2012 Federal budget deficits of $1.4, $1.3, $1.3 and $1.1 trillion, respectively, shrunk to just $680 billion 2013. 4% 3% 2% 1% Apr-13 Sep-13 Nov-12 Jan-12 Jun-12 Aug-11 Oct-10 Mar-11 May-10 Jul-09 Target Fed Funds 5-Yr Treasury 30-Yr Treasury Dec-09 Feb-09 Apr-08 Sep-08 Nov-07 Jan-07 Jun-07 0% 2-Yr Treasury 10-Yr Treasury Fiscal difficulties were much in evidence at the beginning of the 4th quarter. In particular, bipartisan disputes regarding the implementation of President Obama’s Patient Protection and Affordable Care Act boiled over on the commencement of the Federal government’s fiscal year on October 1st. These updated policies and projections were greeted enthusiastically as domestic equity values rallied sharply to new all-time highs while Treasury yields along the medium to longer-term portion of the curve likewise advanced. Target Fed Funds has, historically, been the primary monetary policy tool. On that front, the Committee “reaffirmed its expectation that the current exceptionally low range for the federal funds rate of The Continuing Appropriations Resolution, 2014, which would provide for ongoing funding of Federal operations became the focus of these disputes. The Republican dominated House, led by Senator Cruz attempted to attach riders to the Resolution which would delay or deny funding to the “Obamacare” programs. The Democratic dominated Senate 7 9 8 5 Ibid. See “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013” (December 18, 2013). 10 11 Op Cit., Federal Reserve Press Release dated December 18, 2013. Ibid. Ibid. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 7. countered with measures that would funding with no conditions attached. continue Federal Surplus/Deficit (Billions USD) $400 decline from the 2nd quarter’s report of $96.613 billion. This represents the best report since the 2nd quarter of 2009 when the gap was reported at $86.982 billion near the height of the subprime crisis. $200 U.S. Current Account Deficit $0 (Billions USD) $0 -$200 -$400 -$50 -$600 -$800 -$100 -$1,000 -$1,200 -$150 -$1,400 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -$1,600 -$250 Current & Capital Account Flows More encouraging news was found in the 3rd quarter 2013 current account deficit of $94.840 billion, a 6 (Billions USD) $1,200 $700 $200 -$300 2012 2011 2010 2009 2008 US Gov't Agencies Foreign Bonds US Corporates Foreign Stocks Thru 10/13 US Treasuries US Stocks 2007 -$800 2006 These events will likely limit 4th quarter GDP growth, possibly upwards to 0.5% per some economists. Still, the market generally interpreted these developments as a reduction in the political brinksmanship of recent months and years. Net US/Foreign Capital Flows 2005 By December 26th, President Obama signed into law a 2-year budget package that would forestall the potential for a subsequent government funding crisis in early 2014 and which reverses some previous spending cuts. Still, a further political showdown looms with respect to the debt ceiling as we approach February 7th. Another interesting source of flow of funds data may be found in the U.S. Treasury Department’s Treasury International Capital (or “TIC”) database. This database tracks flows into and out of the U.S. The data is broken into foreign stocks, foreign bonds, U.S. stocks, U.S. corporate bonds, U.S. government agencies and U.S. Treasuries. 2004 These controversies were resolved, at least temporarily, with the passage of a Continuing Appropriations Act, 2014 late in the evening of October 16th, ending the shutdown and suspending application of the Federal debt ceiling until February 7, 2014. Source: Bureau of Economic Analysis (BEA) 2003 Because Congress failed to appropriate requisite funding, the Federal government shut down routine operations from October 1st through the 16th. Some 800,000 Federal employees were furloughed with another 1.3 million employees reporting to work with uncertain payment dates. Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 Source: Office of Management and Budget (OMB) -$200 Source: U.S. Treasury TIC Database U.S. vs. overseas capital flows have generally been characterized over the past decade by substantial influx of funds into U.S. Treasuries. This phenomenon peaked in 2010 as overseas investors purchased some $704 billion in U.S. Treasuries on a | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 8. net basis. The figure tailed off to $433 and $417 billion in 2011 and 2012, respectively, but that still represents sizable values. Equity & Bond Fund Cash Flows (Billions USD) $40 $20 But during the first ten months of 2013 through October, foreign investors purchased a scant $46 billion of Treasuries on a net basis. Despite this surprisingly low total, a rather substantial $500 billion in capital has flowed into the U.S. on a net basis from January through October 2013. $0 -$20 -$40 -$60 Mutual Fund Flows The flow of equity and fixed income investments may be examined per data published by the Investment Company Institute (ICI) which tracks activity in the mutual fund industry. 12 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 Mar-12 Jan-12 May-12 -$80 Most of this inflow has come into U.S. equities with an influx of some $544 billion on a net basis as a result of strong U.S. equity performance and a widespread anticipation of rising rates and falling bond prices. Equity Funds Bond Funds Source: Investment Company Institute (ICI) Funds had generally been flowing into bond funds through May 2013. But June saw the reversal of this trend as investors began to believe that interest rate advances, fueled by economic growth and expectations of tapering of Fed easing programs. By the conclusion of October, some $57.9 billion had been withdrawn from bond funds on a year-to-date basis. Equity Fund Cash Flows (Billions USD) $40 CME USD Index 1,250 $30 $20 Long Short 14.3% EUR 100% USD 14.3% JPY 14.3% GBP 14.3% CHF 14.3% CAD 14.3% AUD 14.3% CNY 1,200 $10 1,150 $0 1,100 -$10 -$20 1,050 -$30 1,000 950 Investors added some $156.5 billion into equity funds during the first eleven months of 2013 through November. Interestingly, only $27.1 billion was directed into domestic equity funds, despite their generally strong performance while another $129.4 billion was added to foreign equity funds. 12 7 Jul-13 Jul-12 Jan-13 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jul-07 Domestic Equities Foreign Equities Source: Investment Company Institute (ICI) Jan-08 900 Jan-07 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 -$40 USD Price Performance The factors discussed above exert an obvious impact upon the price performance of the U.S. dollar vis-àvis other world currencies. In order to monitor this price impact, CME Group has developed the “CME These indicators are often highly correlated with price action as retail investors may “chase” the market by buying in response to a bull trend. Or, they may exhibit a “herd mentality” by liquidating investments in response to significant market breaks. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 9. USD Index” as one in constructed FX Indexes. 13 a family of similarly The CME USD Index ended the year at a value of 1,042.66. This represents an advance of the 3rd quarter’s ending mark of 1,027.22 and well over the year-end 2012 figure of 992.19. (+1.0%), the United Kingdom (+1.9%) and the United States (+2.4%). Note that the Euro (EUR) posted a total return vs. the U.S. dollar (USD) in 2014 of +4.31%; the British pound (GBP) was seen at +2.36% while the Japanese yen brought up the rear at -17.52%. Select DM GDP Growth 5% Germany 2% 1% 0% 2012 2013 2014 -19 (f) 2020 -25 (f) Developed Markets (DMs) Australia 2.6% 2.4% Canada 3.2% 2.6% France 1.7% 2.0% Germany 4.2% 3.0% Japan 4.7% -0.6% UK 1.8% 1.0% US 2.5% 1.8% 3.7% 1.8% 0.0% 0.7% 2.0% 0.3% 2.8% 2.7% 1.4% 0.2% 0.4% 0.8% 0.6% 1.6% 2.3% 2.0% 1.4% 1.6% 1.0% 1.9% 2.4% 2.2% 1.8% 0.9% 1.4% 0.6% 1.1% 1.7% Emerging Markets (DMs) Brazil 6.9% 2.7% Mexico 5.3% 3.9% Russia 4.5% 4.3% India 9.3% 6.2% China 10.4% 9.3% 0.9% 3.9% 3.4% 5.0% 7.7% 2.0% 2.5% 2.9% 4.2% 7.5% 2.9% 2.9% 1.8% 4.8% 5.9% 2.8% 3.1% 1.2% 3.6% 3.5% 2020-25 2014-19 While GDP growth has slowed in many of the emerging economies, such growth has nonetheless generally surpassed that of the DMs. This is expected to continue, according to Conference Board forecasts, albeit the gaps may narrow. Select EM GDP Growth 12% Brazil Russia India 10% China 8% 6% NOTE: (f) = forecast data 4% The CME USD Index represents a basket of equally weighted positions (as of December 31, 2010) of the USD vs. the Euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD) and Chinese yuan (CNY). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010. 2% 2020-25 2014-19 Source: The Conference Board 2013 2012 2011 0% 2010 According to the Conference Board’s Global Economic Outlook, growth in Germany is expected to run at a very moderate +1.6% on an annual basis from 2014-19. Similarly modest growth is expected in much of the developed world including Japan 8 2012 Source: The Conference Board Source: The Conference Board Global Economic Outlook 2014 (November 2013) 13 2011 -1% 2010 2011 US 3% Actual and Forecast GDP Growth 2010 Japan UK 4% Emerging market (EM) economies have been the stars of the investment world for some years now. Still, it was the developed market (DM) economies that provided some of the most positive growth surprises in 2013. While the EM countries generally exhibit higher growth rates than DM countries, that growth has generally decelerated relative to DM economies in recent years. 2013 Global Economic Performance Note that the Chinese yuan or renminbi rallied by 7.07% relative to the USD in 2014. The Indian rupee (INR) was off 2.51%; the Brazilian real (BRL) was down some 6.73% while the Russian ruble (RUB) was off 0.55%. Still, GDP in these nations is anticipated to be relatively strong with China expected to grow in 2014-19 by +5.9% with India | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 10. (+1.8%) CME JPY Index 1,150 1,100 1,050 The implicit assumption is that these interest rate relationships will endure. As such, carry traders implicitly discount classical exchange rate theories by assuming that the interest rate relationships may endure over extended periods of time. This suggests that low-yielding currencies that are sold will not advance; and, that high-yielding currencies that are purchased will not decline. 1,000 Total Currency Return 950 750 Jul-13 Jul-12 Jan-13 Jul-11 Jan-12 Jan-11 Jul-10 Jul-09 Jan-10 Jul-08 Jan-09 Jan-08 Jul-07 Jan-07 700 A massive increase in the Japanese sales tax from 5% to 8% is scheduled to be put into effect in April 2014. This action is likely to boost domestic demand in Japan in the short-run at the risk of diminished long-term demand. These funds are slated to be used for further fiscal stimulus. While prices continue to slip in Japan, most analysts anticipate that “Abenomics” will likely succeed in combating the deflationary pressures that have plagued the Japanese economy since the early 1990s. Total Return One of the most popular long-term FX trading strategies over the past decade is known simply as the “carry trade.” This practice simply suggests that one might exploit “cost of carry” by borrowing in countries with low nominal interest rates to invest in countries with high nominal interest rates. Thus, one might sell the “low-rate” currency and buy the “high-rate” currency. 9 Carry Return (Q4 2013) USD-ISK USD-INR USD-ARS USD-KRW GBP-USD USD-CNY EUR-USD USD-CHF USD-MXN USD-RUB USD NZD-USD USD-TWD USD-COP USD-CAD USD-CLP AUD-USD USD-ZAR USD-BRL USD-TRY USD-JPY -4% 800 Price Movement + Interest Historically, such relationships have been known to endure for extended periods of time, reinforcing interest in the carry trade. In particular, vast sums of money totaling in the trillions of U.S. dollars were invested in the carry trade prior to the outbreak of the subprime crisis, specifically by shorting the Japanese yen (JPY) and investing in other currencies including the Icelandic krona (ISK). -6% Long Short 14.3% EUR 100% JPY 14.3% USD 14.3% GBP 14.3% CHF 14.3% CAD 14.3% AUD 14.3% CNY 850 -8% 900 = 8% Certainly Prime Minister Shinzo Abe’s aggressive efforts to revitalize the Japanese economy played a prominent role in the large scale decline of the Japanese yen vs. the U.S. dollar and other currencies in 2014. The so-called Abenomics program features a target of 2% inflation, negative real interest rates, a form of quantitative easing with asset buybacks and heightened fiscal stimuli. By so doing, one hopes to capitalize on discrepant interest rates, and by implication, divergent investment opportunities, in the two countries. This strategy further recognizes that total currency return consists of 2 components, specifically, exchange rate or price movement plus the accrual of interest. 6% Abenomics Sell low-rate currency & buy high-rate currency Carry trade 4% Russia 2% and 0% (+2.9%) -2% (+4.8%), Brazil following behind. Appendix 2 depicts the total return associated with various currencies, relative to the U.S. dollar, during the most recently completed calendar quarter. The Icelandic krona (ISK) turned in the best return (+6.11%) for the quarter. This was followed by the | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 11. Indian rupee (INR) at +3.68%, the Argentine peso (ARS) at +3.54%, the South Korean won (KRW) at +3.06% and the British pound (GBP) at +2.43%. On the negative side of the ledger, the Japanese yen (JPY) posted a return of -6.66%, the Turkish lira (TRY) checked in at -4.08% with the Brazilian real (BRL) at -3.93%, the South African rand (ZAR) at 3.81% and the Chilean peso (CLP) at -2.80%. Because the carry trade has become such an important and widely followed transaction in the global FX markets, CME Group has developed the CME FX Carry Index. CME FX Carry Index Purchasing Power Parity The theory of purchasing power parity (PPP) dates to the 16th century and the School of Salamanca but was further developed in the early 20th century by economist Gustav Cassel. 15 The theory is based upon the assumption that exchange rates are in equilibrium when purchasing power is equivalent in the two countries. On a granular level, PPP is based on the “law of one price” or the notion that identical products should be priced at the same level in different national markets adjusted for exchange rates. Typically, this law is qualified by the absence of significant trade barriers or other artificial constraints on commerce. 1,050 But the theory of PPP expands the application of the law of one price from any single good or product to generalized prices in any particular economy as measured by inflation indexes, e.g., Consumer Price Index (CPI) or Producer Price Index (PPI). The implication of this theory is that inflation rates and exchange rates should exhibit negative correlation. 1,000 950 900 850 Long Short 16.7% BRL 50% USD 16.7% AUD 50% EUR 16.7% ZAR 16.7% NZD 16.7% TRY 16.7% MXN 800 750 If inflation increases Currency value should decline If inflation decreases Currency value should advance Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jul-09 Jan-10 Jul-08 Jan-09 Jul-07 Jan-08 Jan-07 700 This novel index is designed to follow the performance of a basket of currencies that offer relatively high interest rates and have, at least on an historical basis, generated favorable total returns. 14 The CME FX Carry Index closed the 4th quarter at 808.21 and off 4.2% from its 3rd quarter ending value of 843.70. The Index was further down 12.4% from its ending 2012 value of 922.27. This reflects the general poor performance of EM currencies vs. the USD and EUR during 2013. 14 10 The CME FX Carry Index represents a basket of equally weighted positions (as of December 31, 2010) which is effectively long a basket including the Australian dollar (AUD), Brazilian real (BRL), Mexican peso (MXN), New Zealand dollar (NZD), South African rand (ZAR) and Turkish lira (TRY) vs. short positions in the USD and EUR. It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010. The long components of the CME FX Carry Index were selected in light of the high local interest rates that prevailed in those countries during the post-financial crisis era through 2010. The short components of the index were identified because of the low interest rates offered. Thus, if inflation as measured by an inflation index increases, the value of the currency should generally decline to maintain price equilibrium. Similarly, if inflation declines, the value of the currency should advance. The theory of PPP is closely related to another classic theory that addresses exchange rate values known as the International Fisher Effect (IFE). This theory suggests that the disparity between nominal interest rates in two countries drive the future path of exchange rates. Per this theory, one might expect that the value of a currency with a low nominal interest rate might increase into the future. Or that the value of a currency with high nominal rate might decline. 15 See Cassel, Gustav, “Abnormal Deviations International Exchanges” (December 1918). | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP in
  • 12. IFE further assumes that real interest rates (i.e., the risk-free interest rate less inflation) should generally be equal across countries. This implies that nominal interest rates and inflation are positively correlated. If inflation increases Rates increase Currency value should decline If inflation decreases Rates decrease Currency value should advance The IFE suggests interest rates and exchange negatively correlated. Similarly, PPP suggests inflation and exchange rates are negatively correlated. As such, the IFE theory is generally consistent with the PPP theory. Putting the classic theory of purchasing power parity into practice requires a measurement of inflation in order to calculate the proportion by which any particular currency is (theoretically) over- or undervalued relative to the norm. There are three popular methodologies that have been referenced in this regard. • OECD - The Organization for Economic Cooperation and Development (OECD) provides data that is useful in this regard by comparing price changes in a representative basket of goods in various countries. methodologies, relative to the USD. Other highly valued currencies include the Norwegian krone (NOK) at +29.27%; the Danish krone at +18.76%; the New Zealand dollar (NZD) at +18.11% and the Australian dollar (AUD) at +14.71%. The Brazilian real (BRL) was once again a “big mover” in this regard as its purchasing power has fallen from +17.51% to +6.19% to +0.84% from the 2nd to 3rd to 4th quarters per these measures. Under-valued currencies, per our analysis, include the South African rand (ZAR) at -65.42%; the Turkish lira (TRY) at -56.04%; the Polish zloty (PLN) at -54.97%; the Mexican peso at -53.51%; and, the Malaysian ringgit at -52.52%. One might recommend creating “baskets” of several currencies to buy and sell on the basis of this analysis in order to diversify risks to a certain extent. However, it is important to recognize that currencies might remain in apparent states of overor under-valuation for extended periods of time. In fact, the carry trade as discussed above, takes a completely opposite approach to the classic PPP theory by buying high-rate currencies and shorting low-rate currencies. Impact of Commodities • Bloomberg - Bloomberg offers an analytical tool that is grounded in a very long-term assessment of inflation, as measured by either CPI or PPI in various countries extending from January 1982 through June 2000. As a general rule, the nations whose currencies have remained top performers over the past decade may be identified as those whose national income is tied heavily to commodity production. • Big Mac - Finally, the Economist’s “Big Mac PPP” methodology compares the price of a (almost) universally available product with verifiable pricing in the form of the McDonald’s Big Mac hamburger in various countries. Commodity prices had generally advanced, often sharply, over the past decade as seen in the rise in the value of energy, grain, livestock, precious metals and industrial metals. These price advances have largely been driven by emerging market demand in nations including China and India. Actually, all three methodologies may readily be referenced on Bloomberg quotation devices. Appendix 3 below provides data from all three methods. Further, we have taken the average of the three assessments (where available) for a variety of national currencies and rank-ordered the set from most over-valued to most under-valued. The Swiss franc (CHF) at 34.85% is identified as the most over-valued currency, per these 11 However, those trends have, if not reversed, certainly corrected over the past year. Gold values fell sharply during 2013 to the extent that economic recovery in the developed economies led to much reduced economic anxiety. Note, of course, that gold is much valued, particularly during periods of heightened economic stress as a monetary surrogate of sorts. West Texas Intermediate (WTI) crude oil closed the year at $100.32 per barrel and up from | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 13. its year-end 2012 value of $90.80 but nonetheless off its September 2013 peak of $110.53. CME FX Commodity Country Index 1,100 1,050 Crude Oil & Gold 1,000 $600 850 Gold Source: Bloomberg Grain values including corn, soybeans and wheat generally fell a bit on a productive growing season coupled with moderating global demands. 750 700 Jul-13 Jul-12 Jan-13 Jul-11 Jan-12 Jan-11 Jul-10 Jan-10 Jul-09 Jul-08 1,120 $16 1,080 $14 1,040 $12 1,000 $10 960 Wheat Source: Bloomberg CME Group has developed the CME FX Commodity Country Index to follow the performance of a basket of currencies from nations that rely heavily upon the exportation of commodities and other raw materials. To the extent that commodities have been in great demand over much of the past decade, these currencies have, on a historical basis, generated favorable total returns. 16 The CME Commodity Country Index is constructed to be effectively long Australian dollar (AUD), Brazilian real (BRL), Canadian dollar (CAD), Norwegian krone (NOK), Sep-13 800 Jan-12 Jun-12 Nov-12 Apr-13 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jul-10 Jan-11 Jan-10 Soybeans Long Short 25% BRL 100% USD 25% RUB 25% INR 25% CNY Jan-07 Jun-07 Nov-07 Apr-08 Corn Jul-09 840 Jan-09 $2 Jul-08 880 Jan-08 $4 Jul-07 920 Jan-07 $6 Oct-10 Mar-11 Aug-11 $8 Sep-08 Feb-09 Jul-09 Dec-09 May-… $ per Bushel Jan-09 The CME FX Commodity Country Index fell to 857.91 and off 3.2% from its 3rd quarter value of 886.53. This represents a decline of 10.0% decline for the year 2013 from its year-end 2012 value of 953.60. This performance is a reflection of the generally tepid performance of commodity markets in 2013. CME FX BRIC Index Grains 12 Jul-07 650 $18 16 Long Short 16.7% AUD 100% USD 16.7% BRL 16.7% CAD 16.7% NOK 16.7% NZD 16.7% ZAR 800 Jan-08 Apr-12 Crude Oil 900 Jan-07 $800 Gold ($ per troy oz) $40 950 Jun-13 $1,000 Nov-12 $60 Sep-11 $1,200 Jul-10 $80 Feb-11 $1,400 Dec-09 $100 Oct-08 $1,600 May-09 $120 Mar-08 $1,800 Jan-07 $140 Aug-07 $2,000 $20 Crude Oil ($ per Bbl $160 CME Group has further developed the CME FX BRIC Index to follow the performance of select “emerging market” economies and their national currencies, namely the Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan (CNY), New Zealand dollar (NZD) and South African rand (ZAR) vs. a short position in the U.S. dollar (USD). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 14. that have created much of the commodities in the world today. 17 demand for The CME FX BRIC Index ended the year 2013 at 858.26 and off 1.46% from its 3rd quarter mark of 870.99. This represents a decline of 6.8% from its year-end 2012 value of 920.65. These negative results further reflect the general deceleration of emerging market growth. Conclusion CME offers a broad array of currency futures and option contracts covering a wide range of currency pairings (where one side is the U.S. dollar) and cross-rate pairings (which do not involve the U.S. dollar). These products provide facile and liquid vehicles with which one may express a view on prospective market movements. Or, to manage the risks associated with currency holdings or international investments during turbulent times. 17 13 The CME BRIC Index is constructed of equal weightings of long Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan (CNY) vs. a short position in the U.S. dollar (USD). Like other CME FX indexes discussed above, the BRIC Index was equally weighted and calibrated to equal an arbitrary 1,000.00 as of December 31, 2010. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 15. Appendix 1: Summary of World Economic Conditions Australia Growth, Inflation & Fiscal Policy Monetary Policy Special Factors Growth, Inflation & Fiscal Policy Monetary Policy Special Factors 14 Australia’s economy has weakened since the days of the commodity boom. Problems may persist into 2014 with low gold prices potentially leading to mine closures. Short-term interest rates have been lowered to cushion economic growth without fear of inflation pressures accelerating. Further rate declines could keep the currency on a weakening path. The Australian dollar was once a favorite for the long-side of the carry trade. With lower rates, China risk, weak-to-stable commodity prices, and less than favorable comparisons to New Zealand, the bloom may remain off the Aussie dollar. China Economic growth in 2013 ran about 7.6% in real GDP terms. China may squeeze out 6.5% to 7% real GDP growth in 2014, as the economy avoids a hard landing but continues to face challenges in its transition to a domestic demand growth model. Monetary policy remains in flux as China tries to curtail past rapid expansion of credit while also pushing for more rapid development of financial institutions, including derivative markets. China’s new leadership has moved to relax the one-child policy and make moving from the rural to the urban sector easier. For 2014 and 2015, China may speed up the pace toward normalizing the currency. Brazil Economic growth may move incrementally higher in 2014. Risks remain due to public unrest surrounding a lack of perceived progress with many government services against a backdrop of hosting the World Cup and the Olympics. The short-term SELIC rate has been raised to help stabilize the currency. Any currency strength that might emerge in 2014 could be met with rate cuts. Brazil hosts the World Cup in 2014 and the Olympics in 2016. How political uncertainties are resolved ahead of these high profile events is the major risk factor for the currency. European Union Europe appears to have stabilized and may even show some incremental economic growth in 2014. Challenges remain with an undercapitalized banking sector holding back a return to more robust economic activity. The ECB may become more aggressive in supervising banks in 2014 as it is pushed into taking the lead in EU-wide financial reform. Rates are likely to remain on hold. Liquidity will be made available to banks as needed. Leadership in the European Union is weak. Germany held elections in September, but it took three months for Chancellor Merkel to put together a coalition Government. France’s President ranks extremely low in the opinion polls. The Euro carries considerable political risk going into 2014. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP Canada Canada is benefiting from the continued jobs expansion in the US. On the negative side, the domestic oil sector has some challenges and delays in the US decision on the Keystone pipeline are not helping economic confidence. Canada’s rates are low. There are no inflation pressures. The Bank of Canada seems comfortable with the current set of policies, at least so long as the US keeps its federal funds rate near zero. Rate differentials with the US are too small to support the Canadian dollar. The big risks are in the energy sector. Weaker oil prices or a US decision against the Keystone pipeline would probably hurt the currency. India Like China and Brazil, India saw a rapid deceleration of economic growth in 2012 and 2013. To tackle the current account deficit, tariffs have been raised on gold imports. Large energy and food subsidies, though, remain a big challenge for the Government. India has installed a new head of the central bank with a mission to reform the financial sector. Only time will tell, but the new direction is a welcome change for the currency markets. The Indian rupee was very weak in the second and third quarters of 2013, before stabilizing in the fourth quarter. With the trade balance potentially narrowing a little and financial reforms on the way, the rupee has a chance to reverse course and appreciate, but only if global markets embrace greater risk taking.
  • 16. Appendix 1: Summary of World Economic Conditions, cont. Japan Growth, Inflation & Fiscal Policy Monetary Policy Special Factors Mexico Japan faces a big hike in its national sales tax in April 2014. This is expected to lead to anticipatory spending in the January-March 2014 quarter, and then negative real GDP afterwards. With economic growth in the US economy continuing at a healthy pace, Mexico should benefit from increased trade with its partner to the north. The Bank of Japan is pursuing the largest quantitative easing (asset purchase) program relative to GDP ever attempted to raise inflation and economic growth. Inflation is ticking upward, mostly in response to past yen weakness. A 2% inflation target by the Bank of Japan is not likely to be achieved in a short time frame unless there is further yen depreciation toward the 120-140 yen/dollar rate. Nothing moves in a straight line, though, and the coming sales tax hike adds considerable risks to the timing of any scenario. Switzerland Currency strength in 2012 helped to reduce inflation pressures. Recent currency weakness in 2013, however, threatens the progress on inflation. Central bank policy is probably on hold for now. Russia has accumulated a large quantity of foreign reserves giving the authorities some firepower to counter any ruble weakness, if they so choose, during periods of oil market weakness. Mexico’s currency emerged as one of the favorites for the long-side of the carry trade versus the Japanese yen, but only in “risk-on” markets. Conditions in 2014 suggest the possibility for a peso rebound if a “risk-on” climate returns to global markets. Russia’s energy supply dominance of Europe is being challenged by increased oil and natural gas supplies around the globe. If the link in Europe between natural gas pricing and Brent oil is broken, this could hit Russian government revenues quite hard. United Kingdom United States The US economy appears poised for robust growth in 2014 as the post-crisis deleveraging fades into history and fiscal stability is achieved faster than expected. The Federal budget deficit may decline below 3% of GDP in FY2014 and be balanced on an operating basis in FY2015. The Federal Reserve has announced that the US economy no longer needs emergency life support, and the tapering of QE has begun. Even with a declining unemployment rate, the Fed has made it clear it will keep its zero federal funds rate policy in place until it sees some inflation pressure, and there is none in sight yet. The US dollar is not a strong currency, but other major currencies are challenged as well. Markets may start to focus as 2014 progresses on which country might raise rates first in 2015. For now, the UK is the leading contender, the US and Eurozone in the middle, with little probability of rate rises in Japan for a much longer time. Growth, Inflation & Fiscal Policy Switzerland will benefit in 2014 from Europe’s stabilization. Moreover, stronger growth in the US may also help exports. The UK has a very strong housing market and prospects for solid economic growth in 2014. Fiscal policy is less restrictive than in the past few years as the Government looks ahead to elections in 2015. Monetary Policy As the EU debt crisis has morphed into a longterm banking capital adequacy problem, the Swiss have little flexibility, and they are likely continue to keep a lid on the Swiss franc relative to the euro. The Bank of England has indicated it plans to keep rates low and focus its efforts on financial supervision. A stronger economy than expected by the BoE and some emerging inflation pressure could change that guidance during 2014. Special Factors The post-2008 financial crisis has led to increased regulation of financial institutions all over the world. On net, this increased regulation poses additional challenges for the traditional model of Swiss secrecy and the overall role of Switzerland in the world’s financial system. Tensions between the UK and the European Union are likely to intensify, especially over the push by the EU to impose financial transaction taxes. As the UK outperforms the Euro-zone economically, the possible scenario for pound strength versus the euro may come into play in 2014. 15 Russia Elevated crude oil prices have benefitted Russia’s economy, but an aging population and a difficult environment for foreign investment suggest slower economic growth in the years to come. There are key recent signs, though, of Russia attempting to become friendlier to foreign investment. | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
  • 17. Appendix 2: Select Currency Performance (4th Quarter 2013) Currency Ticker Argentine Peso Australian Dollar Brazilian Real British Pound Canadian Dollar Chilean Peso China Renminbi Colombian Peso Euro Icelandic Krona Indian Rupee Japanese Yen Mexico Peso New Zealand Dollar Russian Ruble South Africa Rand South Korean Won Swiss Franc Taiwanese Dollar Turkish Lira United States Dollar USD-ARS AUD-USD USD-BRL GBP-USD USD-CAD USD-CLP USD-CNY USD-COP EUR-USD USD-ISK USD-INR USD-JPY USD-MXN NZD-USD USD-RUB USD-ZAR USD-KRW USD-CHF USD-TWD USD-TRY USD Spot Quote (12/31/13) Quote Convention 3-Mth Rates (12/31/13) 6.5197 0.8918 2.3621 1.6556 1.0623 525.45 6.0556 1,923.00 1.3743 115.18 61.8000 105.31 13.0453 0.8210 32.9000 10.4925 1,052.85 0.8922 29.830 2.1480 USD per 1 ARS AUD per 1 USD USD per 1 BRL GBP per 1 USD USD per 1 CAD USD per 1 CLP USD per 1 CNY USD per 1 COP EUR per 1 USD USD per 1 ISK USD per 1 INR USD per 100 JPY USD per 1 MXN NZD per 1 USD USD per 1 RUB USD per 1 ZAR USD per 1 KRW USD per 1 CHF USD per 1 TWN USD per 1 TRY USD 20.20% 2.64% 1.0000 0.50% 1.21% 7.50% 0.23% 5.95% 8.90% 0.11% 3.79% 2.93% 7.00% 5.15% 2.58% -0.04% 0.87% 9.48% 0.23% 4th Quarter 2014 Total Spot Interest Return1 Return2 Return3 3.54% -11.17% 16.56% -3.65% -4.29% 0.67% -3.93% -6.14% 2.36% 2.43% 2.30% 0.12% -2.68% -2.96% 0.29% -2.80% -3.95% 1.20% 1.81% 1.10% 0.71% -0.41% -1.22% 0.82% 1.64% 1.60% 0.05% 6.11% 4.51% 1.52% 3.68% 1.32% 2.33% -6.66% -6.69% 0.03% 1.18% 0.42% 0.76% -0.33% -1.04% 0.71% 0.21% -1.46% 1.69% -3.81% -4.43% 0.65% 3.06% 2.37% 0.68% 1.33% 1.34% -0.01% -0.38% -0.60% 0.22% -4.08% -6.04% 2.09% 0.06% 0.06% Notes (1) Return from price movement and interest (2) Return from currency price movement vs. USD as “base currency” (3) Return from interest at prevailing 3-month rates or implied NDF rate Source: Bloomberg 16 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP 2014 Year-to-Date Total Spot Interest Return1 Return2 Return3 19.70% -24.61% 58.77% -11.72% -14.21% 2.90% -6.73% -13.15% 7.39% 2.36% 1.86% 0.49% -5.55% -6.61% 1.13% -3.85% -8.80% 5.43% 7.07% 2.91% 4.04% -5.13% -8.42% 3.59% 4.31% 4.17% 0.14% 17.71% 11.15% 5.90% -2.51% -11.01% 9.55% -17.52% -17.62% 0.12% 1.98% -1.41% 3.43% 1.95% -0.89% 2.87% -0.55% -7.13% 7.09% -17.12% -19.24% 2.62% 3.74% 1.39% 2.32% 2.50% 2.52% -0.02% -1.76% -2.60% 0.86% -10.76% -16.97% 7.90% 0.27% 0.27%
  • 18. Appendix 3: Purchasing Power Parity (“PPP”) Analysis (as of 12/31/13) Currency Swiss Franc Norwegian Krone Danish Krone New Zealand Dollar Australian Dollar Swedish Krona Icelandic Krona Euro Canadian Dollar British Pound Brazilian Real Colombian Peso Japanese Yen Singapore Dollar Chilean Peso South Korean Won Czech Koruna Argentina Peso Thai Baht Chinese Renminbi Phillipines Peso Russian Ruble Hungarian Forint Indonesian Rupiah Hong Kong Dollar Malaysian Ringgit Mexican Peso Polish Zloty Turkish Lira South African Rand ISO Code CHF NOK DKK NZD AUD SEK ISK EUR CAD GBP BRL COP JPY SGD CLP KRW CZK ARS THB CNY PHP RUB HUF IDR HKD MYR MXN PLN TRY ZAR Average 29.57% 29.27% 18.76% 18.11% 14.71% 12.37% 11.72% 10.13% 8.07% 5.11% 0.84% -9.93% -16.77% -20.85% -23.45% -24.44% -26.95% -31.41% -41.43% -41.51% -45.85% -47.13% -47.70% -49.45% -51.90% -52.52% -53.51% -54.97% -56.04% -65.42% % Over/Under Valued Bloomberg Bloomberg OECD (CPI) (PPI) 34.85% 23.14% 9.96% 30.10% 8.35% 28.09% 18.63% 18.11% 15.02% 29.17% 36.64% 25.87% 25.06% 19.94% 24.75% -5.78% -3.34% 11.72% 4.76% 17.39% 13.87% 14.33% 10.38% -0.29% 11.41% 15.12% 3.49% 2.14% -16.71% -13.59% -24.80% -77.57% -67.80% -70.23% -95.63% Notes Please note that data regarding all countries is not generally available. Source: Bloomberg 17 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP Big Mac 50.32% 49.35% 10.21% -8.40% -12.04% 33.85% 4.49% 7.87% -9.58% 0.84% -9.93% -38.93% -20.85% -23.45% -24.07% -26.95% -31.41% -41.43% -41.51% -45.85% -47.13% -17.82% -49.45% -51.90% -52.52% -39.22% -39.70% -16.44% -65.42%
  • 19. Copyright 2014 CME Group All Rights Reserved. Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)18 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. CME Group is a trademark of CME Group Inc. The Globe logo, E-mini, Globex, CME and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is a trademark of the New York Mercantile Exchange, Inc. The information within this document has been compiled by CME Group for general purposes only and has not taken into account the specific situations of any recipients of the information. CME Group assumes no responsibility for any errors or omissions. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, NYMEX and CBOT rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action. 18 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP

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